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How to avoid the Asian flu

Impact on transportation likely to be good or badAmerica's trade deficit is on the march. That should surprise no one, given the falling value of Asian currencies compared with the dollar, and the sagging earnings among major Asian customers for U.S. durable goods.Is this a significant problem for the U.S.? What is the impact on transportation? There are a wide variety of opinions regarding the answers

Martin Labbe | Jul 01, 1998

Impact on transportation likely to be good or bad

America's trade deficit is on the march. That should surprise no one, given the falling value of Asian currencies compared with the dollar, and the sagging earnings among major Asian customers for U.S. durable goods.

Is this a significant problem for the U.S.? What is the impact on transportation? There are a wide variety of opinions regarding the answers to these questions, leading to very different courses of action for both the government and the business community.

A trade deficit, in and of itself, is not bad. Consumption and business investment can expand beyond the capabilities of U.S. output, thus increasing the standard of living in the U.S.

But since more money moves abroad than we are earning from our exports, America must find the funds to finance the trade deficit. That translates into higher interest rates and/or a decline in the value of U.S. currency. Again, this takes some time to happen -- unless the deficit is so large that it forces a major adjustment in the exchange rate.

The benefit of increased foreign competition due to an appreciation of the U.S. dollar is that it helps keep inflation under control. Thus, as the U.S. dollar continues to increase in value, it will reduce the potential cost to the U.S. consumer for that imported good.

To the extent that the increased sale of imported goods replaces demand for domestically produced goods, U.S. employment levels will drop. This leads to a reduction in consumption patterns among the unemployed.

As foreign goods displace domestic goods, demand for transportation is reduced. Over time, the erosion of domestic output will reduce economic activity in the U.S. -- unless export demand can offset it.

In the long run, the benefits of free trade, at least in the minds of most economists and politicians, allow resources to be shifted to meet opportunities. In fact, it can work with minimal disruption as long as there is overall growth. Nonetheless, the short-term disruptions are painful for those directly affected

The results of the Asian financial collapse are likely to produce significant structural changes that will lead to long-term adjustments. One example is the automotive sector, where demand is expected to slip. Much of that demand had been pulled into the first half of 1998 from the second half of the year because of incentives offered by the automakers.

A second offset will be up to domestic producers and their channels of distribution. The network of dealers and manufacturers will be able to retain price competitiveness for the short term. They can reduce margins with the anticipation that the currency exchange rates will return closer to levels seen early in 1997. If that timetable is short enough, there won't be a significant shift in share to the imported source. However, if the timetable for exchange-rate movement stretches out to three or four quarters, one would expect to see more substantial share gains for the imports.

Trade restrictions to offset this cycle are not likely, either as formal restrictions or as informal quotas. The stakes are too high for the foreign source to restrict its earnings opportunities by selectively reducing shipments to the U.S. market. Its domestic markets are not likely to recover any time soon, and they will require the foreign trade boost for their own survival.

Another benefit of the Asian flu is that investment restrictions will likely start to be removed. As a result, U.S.-based and other worldwide manufacturers will be able to gain ownership positions as well as the potential for domestic sales opportunities in these restricted areas.

Will we learn from this situation? Yes, but it will lead to different policies, depending on the analytical approach taken. It could be argued that world trade has led to a greater level of economic instability. It could also be argued that worldwide markets -- financial and goods -- are more able to cope with disruptions as discreet occurrences without dramatic global impacts.